A steady hand on the wheel is a given for Saga’s cruise ships. But its car insurance business shows signs of veering off-course. The over-50s market specialist slashed its profit guidance by two-fifths as a result of the rising cost of motoring claims on Tuesday.
Shares lost up to a quarter in response. That left them at an all-time low, valuing Saga at just £150mn, from £2bn five years ago. Other motor insurance groups Admiral and Direct Line slid as well.
The rising cost of accident repairs is a reverse for the sector. The group did well when cars were kept off the road during the pandemic. Parts shortages, rising energy and labour costs and high prices for used cars have since hit earnings. Underlying profit before tax would now be between £20mn and £30mn, two-fifths less than previously expected, Saga said. Share prices across the board have fallen between 40 and 60 per cent since the start of the year.
But signs of policy price rises hint that an inflection point is near.
Motor claim inflation currently runs at 13 per cent, up from 9 per cent in July, Saga said. Admiral already says it expects inflation of 11 per cent during 2022. The market leader has taken action. Admiral increased prices for new policies by 16 per cent in the first half.
The wider market should expect something similar. Expect UK motor insurance to increase another 15 per cent to cover claim inflation, thinks Thomas Bateman at Berenberg. Indeed, prices have risen on average by 3 per cent per month between June and August, according to ONS data. That should halt any further losses from rising costs.
Valuations do not reflect any optimism. Direct Line and Admiral trade at 8 and 15 times forward earnings respectively, near their decade lows.
A tight correlation between valuations and UK motor prices exists, notes UBS. A sector knocked out of kilter by customer accidents might also then be a haven for investors during these choppy economic times.
Source: Financial Times